Changes to the Franchising Code of Conduct
Amendments to the Franchising Code of Conduct require changes to franchise agreements entered into, renewed or extended on or after 1 July 2021. The purpose of these amendments is to improve the fairness and transparency of franchising, and to provide protection to parties who wish to enter into franchise agreements. The changes to dispute resolution provisions came into effect on 2 June 2021 and the changes to disclosure documents will come into effect from 1 November 2021. The most significant amendments are outlined below.
Dispute Resolution and Complaints Handling
Dispute resolution changes commenced on 2 June 2021 and apply to disputes arising after this date under any franchise agreement. The amendments expand the paths available for resolving a dispute under a franchise agreement, where conciliation and arbitration can be used in addition to mediation, and a procedure is provided for multiple franchisees to run a dispute together.
The changes to disclosure documents only come into effect from 1 November 2021. The amendments will require an increased number of documents that must be provided to the franchisee. Franchisors will be required to develop a new mandatory Key Facts Sheet, being a short-form summary of the larger disclosure document. The Key Fact Sheet must be provided at least 14 days before entering into a franchisee agreement. Franchisors must update the Key Fact Sheet within 4 months after the end of each financial year. The Government have created a Key Facts Sheet form that can be accessed here.
The ACCC’s information statement has been improved by the amendments and must be provided to prospective franchisees, prior to being provided other related disclosure documents. The information statement can be accessed here.
Termination of Franchise Agreements
Proposal to Terminate
Franchisees are now provided with an explicit path to request the early termination of their franchise agreement. Franchisees can give franchisors a written proposal to terminate their franchise agreements, provided that the reasons for termination are set out in the proposal. Franchisors must provide franchisees with a written response within 28 days.
Cooling Off Period
The amendments allow franchisees to terminate a franchise agreement after entering into the agreement. The cooling off period has been extended from 7 calendar days to 14 calendar days. However, the cooling off period will only apply once franchisees have received a document setting out the terms of the proposed leave.
Significant Capital Expenditure
The recent changes to capital expenditure for automotive franchises has been broadened to the whole franchising sector. The changes place an increased emphasis on pre-contractual disclosure of significant capital expenditure that will be required from franchisees during the term of a franchise agreement. Franchisors must not require franchisees to undertake significant capital expenditure during the franchise agreement. However, significant capital expenditure excludes expenditure that is disclosed to the franchisee before entering into or renewing the agreement, or extending the term or scope of the agreement, if expenditure is to be incurred by most of or all the franchisees, expenditure that is incurred by the franchisee to comply with legislative obligations or expenditure that is agreed by the franchisee.
Before entering into, renewing or extending the franchise agreement, franchisors and franchisees must discuss the expenditure. If a disclosure document for a franchise agreement disclosed expenditure, franchisors must include in the document the rationale, the amount, timing and nature, the anticipated outcomes and benefits, and the expected risks associated with the expenditure.
Marketing Funds and Penalties
There are new civil penalties for breaches involving marketing funds. The amendments ensure consistency in the civil penalties imposed on franchisors who fail to comply with the reporting obligations and requirements of a marketing fund. All civil penalties under the Franchising Code are set to double in a separate amendment to the Franchising Code.
For further information about how these new amendments may impact you as a franchisor or franchisee, please do not hesitate to contact us.
Craig Higginbotham and Isobel Bathgate
12 July 2021